05 Apr How to Get 7M in Funding with Mark Sears

Episode Summary

Today’s guest on The Successful Pitch is Mark Sears, the CEO and founder of Cloud Factory. Mark turned a two-week vacation to Nepal into a six-year journey creating his startup. He’s raised over $7 million in multiple rounds of funding and takes us through the journey of just how he did it. He said, “When you see the world as flat, you can then build your brand globally. They key is punch above your weight limit.” In other words, get top talent. When you have a culture that defines your why, your passion, your mission attracts the top-T people to join your team and that’s really what investors are looking for when they give you funding. Enjoy the episode.

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How to Get 7M in Funding with Mark Sears

Today’s guest is Mark Sears, the founder and CEO of Cloud Factory, which is a startup focused on changing how the world works by using technology to make it easy for startups to scale. Who doesn’t want to do that? It believes that talent is equally distributed around the world but opportunity is not. He has a mission to create meaningful work for one million people in the developing world. That’s going to be an interesting topic for sure. Mark, welcome to the show.

Thanks very much. It’s my pleasure, excited to chat.

Mark, I always like to ask my guests, what was your passion for starting Cloud Factory? How did you get on this entrepreneur journey?

It definitely was born out of a passion, out of a personal life event, you’d say. 2008, my wife and I are Canadian, we decided to head over to the Middle East. My wife got an opportunity for a job there and I was running an online company receiving software royalties and we were just in a position where we could do it. We don’t have kids yet, we want to travel and we can do that from the Middle East.

It was back in 2008 when we were there that we had an opportunity to travel. On our bucket list was to go to Nepal, so in 2008, we went to Nepal for a two-week vacation. I had two very good Nepali friends that I had the opportunity to go meet their families. It was during that time, you mentioned in the intro, that we’ve learned and believed in the thesis that talent is equally distributed around the world but opportunity is not.

It was definitely on that trip where I recognized that. I met three young software engineers and just was blown away. I’m a software developer as well, I don’t get to do too much anymore, but that’s how I started. We really saw the opportunity. It’s something like there’s 1.1 billion people have come online for the first time in the last five years and there’s another billion coming online in the next five. We’re in the middle of a decade where two billion people are coming online. They’re super talented, they’re hungry, they’re hardworking and we just really found this opportunity. That two-week vacation actually turned into living in Nepal for six years. It was. It was Kathmandu, Nepal. That’s where a lot of our operations are today. It certainly wasn’t a vacation. We’ve worked pretty hard those six years to get things off the ground.

I’m always interested in helping startup founders, when they’re working on their pitch, come up with the reason why. Your “why” of why are you doing this besides making money has to be so much bigger than just making money. Investors want to know what your “why” is when they decide whether they’re going to fund you when you’re pitching because that’s what keeps you going when things don’t go well. Let’s talk about your philosophy on why they must, not only define it but you say redefine their “why.” Can you tell us what your “why” is and how you’ve defined and redefined it?

Get 7M in Funding: Our “why” is creating meaningful work.

You’ve allude a little bit to the crazy ambitious social mission of connecting a million people to online work. Our “why” is creating meaningful work. We believe that work is this a huge and wonderful thing when it’s done right. There are so many people in the world that do not have that opportunity to work. Earning, learning, growing, finding community, work is more than a paycheck. That for us is what drives us. We‘ve all received opportunities to get where we are. As a team, we get to come together, build a really great profitable business that can scale and create opportunities for many others, and especially for people that live in places where there aren’t many. Our “whys” is definitely about that. We’ve got tons of t-shirts, create meaningful work t-shirts, lots of different things that continue to remind us of our “why.”

It has been a really big focus of the company. We spend a lot of time thinking about what is meaningful work, why are we doing what we are doing, and building a culture really around that idea. The opportunity and the responsibility for us is operating in places like Kathmandu, Nepal and Nairobi, Kenya, where our operations are, is how do you do this in a way that can really invest into the next generation of leaders? Because we employ mostly eighteen to thirty year olds, about 2,500 people on a part-time basis, and around almost 200 on a full-time basis. It’s really an important aspect for us and I think it served us well. Like you said, when things don’t go as planned, you hit road bumps, things never go in a straight line. It’s always a crazy jagged left and right turns, and there’s no question that being able to make decisions through the lens of your “why” is important. It served us well.

Assembling a team is one of the most important things that investors look for. I think having a “why” defines the culture of the startup you’re doing and then that helps you filter out who belongs to your team and who doesn’t. Would you agree?

No question. It’s played a big role. The “why” is a big part of attracting the right talent and filtering out some of the talent that we don’t want as well. We absolutely want people who want to be a part of a growing successful tech startup. But we also want people that get excited about the opportunity that we specifically have as a company. I believe it has attracted people for the right reasons. I believe we’ve been able to punch above our weight in terms of recruiting people that are excited about the social mission that we have. Like we talked about, it also helps us all stay united and grounded in the ups and downs that can be the startup life.

Because it allows you to attract better talent when you have a culture and a “why” defined that makes it really strong, right?

Yeah. It’s no question. Everyone talks about millennials and just how they’re looking for more purpose necessarily than just compensation. I think that in general, there’s been a big shift obviously. When you’re dedicating so much of your life to work, you want it to be something that has some purpose and meaning and end-of-the-game game. I know for me, I was a part of a great startup, we raised $40 million. We grew from five to 140 people in fourteen months. It was fantastic. But I ended up leaving that startup because they didn’t have a “why.” I literally woke up, sleeping under your desk, working 20 hours, sleeping for four hours under a desk as a developer and project manager and product manager.

The only why that I was given was we’re making games run faster on Japanese teenager phones. That wasn’t enough for me to continue investing what I was investing. A lot of people have that. A lot of people are looking for and really needing to understand. Even as families, people want to understand when their spouse is going to be gone, and sacrificing. What exactly are we even as a family investing into?

That’s clever. Everybody has to be invested in making this a success. Take us back, Mark, to how you raised money. Can you take us back to what it was like pitching for funding? Tell us exactly how you came up with the amount you wanted, was it from one investor, multiple investors? Anything you can share on that journey would be very helpful for our audience.

Certainly, I can take you back but I don’t even have to go back that far. We’re very active in a fundraise right now. We’re daily in the thick of it, which is great. It’s fantastic. I’ll go back to beginning. We’ve raised about $7 million to date. We started with a $700,000 seed round about four and a half years ago. It very much shapes the company that we are today. We found a small private equity fund. It’s a $12 million initial fund. The second fund is now $50 million. We ended up connecting at a conference. They were just raising the fund. They really liked what we were doing. Had a thesis that involved emerging economies and the rising middle class as producers and consumers, etc. It was very, very interesting conversations. It led to us coming to Raleigh, Durham, North Carolina where they were based. We ended up opening up our US sales marketing headquarters here, which was not the plan.

That was a very interesting raise that has led to a very significant partner, obviously a board member and mentor in many ways. That was an interesting raise because they were actually, like I said, raising their fund at the same time. We were their first investment for that fund. I was doing a little bit of a dog and pony show for them as they were raising their funds saying like, “This is the type of company that embodies our investment thesis.” It was weird to be helping them actually raise their money in order to get a portion of that as our seed investment.

It’s so important that your investors also fit into your culture as well. That sounds like you found the perfect fit there.

It’s actually been hard because they set the bar pretty high. It’s hard for us to find, since then, to find people that are really ready to get strapped to the mast and bring more than just capital.

I always talk to people about, when you pitch, especially for the seed round, you need to be able to say, “Here’s who we help and what problem we solve.” Can you take us back a little bit, Mark, to a 90-second elevator pitch that would describe that so people would go, “That’s interesting, we want to have you come in and give a ten minute pitch to the group,” or what have you.

Get 7M in Funding: The story was really mostly around the opportunity; what would it look like if we were able to take this platform.

Four and a half years ago, it seems like a century ago. It’s hard to do the time travel back. There’s no question that seed round versus our series A versus our series B that we are currently raising, absolutely different things that we are talking about and able to talk about in our pitch. Back to the seed round, we didn’t necessarily have a large established team even at the time, in terms of a leadership team. We weren’t putting forth team. We weren’t putting forth revenue, obviously at that stage.

The story was really mostly around the opportunity. We talked a lot about what would it look like if we were able to take this platform, at that time we had a technology platform or work platform that split work up into small micro-tasks and allowed us to do a lot of automated quality control and really allow us to connect to a company so that they could send work in via API, so over the internet. We had some technology. We definitely did a lot of demos of that to help them understand the vision and the fact that we have some progress. The problem that we really pitched was more of the bad alternatives that are out there right now for our target customers. People that need to get back office work done right now are doing it in a pretty old stale traditional way. It’s the typical outsourcing type model. We just knew that there was a better way to do it that was very, very tech-centric in its approach.

We talked a lot about the pain that was involved in the current ways that the customers we talked to were getting it done and how we can use technology to do it much better. It was more from that perspective. It was more from the opportunity of the amount of talent that’s available in what we call emerging or frontier locations, like Nepal and Kenya. You have obviously Urban India and Urban Philippines and China that obviously are contributing a lot to getting work done. Be that high level IT to more of the back office business process outsourcing, etc.

We talked a lot about the emerging locations and how they’re coming online with such amazing talented people. Obviously, at that time we were based solely in Nepal, we hadn’t expanded to Kenya. We talked a lot about that. We were in a great place. We had a great engineering team at that time, so we were able to train up and see a great Ruby on Rails team. We had a lot of fire power in terms of engineering. We had a great opportunity, obviously a huge supply of talent. We were able to show a glimpse through our technology that there’s a better way to get routine repetitive work done.

I want to underline something you mentioned there, that you really were able to paint a picture of the pain of your ideal customer or potential customers. The more you understand your customer’s problems, the better the investors think you have the solution. It sounds to me like that’s exactly what you did there.

I would maybe just tweak that to say that it proved that we knew how to build the solution and deliver the solution that could take away that pain. Obviously, at the seed stage, you may have something but you’re still far away from product market fit, most companies. For us, it was showing that we understood the bad ways that are trying to solve the current problem their customers face is one thing. Like you said, gave the confidence that we could build and scale a solution.

Now, you’ve got some revenue. You hit some milestones, I’m assuming, and you decide, “Now, we’re going to go for series A.” How much was that?

It was a total of $5 million. It was $3 million equity and $2 million debt.

What were the differences in the pitch? Obviously, you now have some traction. Do you talk about what we’re going to do with this $5 million? Do you talk about exit strategies at this point? What kind of questions are you getting asked that are different from the seed pitch?

That’s a good question. The story and the pitch around our series A was a lot of it had to do with our growing customer base. Yes, we had a revenue that was trending well. The numbers were good for the stage. That was there. The biggest story that we centered on was the quality of our growing client base. We had a group of customers that really proved that we were onto something. If so and so is trusting you and paying you this much money this quickly, that’s exciting. Having that referenceable client base that’s actually paying significant money, and the key was that it was growing. We’d have a customer that came on at $10,000 a month and they were going to $20,000, $30,000 a month. That kind of expansion from quality names was probably the biggest story in our series A pitch.

Let me ask you a couple more questions around that because it triggers three questions. The first one is, do you keep in regular contact with your clients? Because I know a lot of investors tell me that that’s one of the key things that they look for, that you’re proactive in reaching out to your customers to see what they like and don’t like. Do you have a system in place to do that?

Get 7M in Funding: We’ve actually recently launched a formal customer success team. We work with our customers regularly.

We do now. We’ve actually recently launched a formal customer success team. We work with our customers very, very regularly. But like you said, that’s a little bit more in the reactive way when things need to get done. We do now have a customer success team that is proactively checking in. Those touches have been really, really key for us. For us, it’s different because our motivation obviously is to have very satisfied customers, but we have so much expansion opportunity. When people like using Cloud Factory, when they trust it as a great way to get their work done, they grow their spend immensely. That makes it really easy for us to not look at it as an expense at all. It is absolutely a great investment for our business. That makes it easier. You want to stay in close contact.

Would you recommend startup founders like yourself to start that proactive connection sooner than later?

I think it’s definitely required. Obviously, everyone’s deal size and model is different. If you’re selling something that’s a one-time versus a SaaS subscription, if it’s a $300 deal size, if it’s a $100,000, obviously, there is a correlation between how much you can really invest into each client relationship depending on some of those variables. For where we’re at, there’s no question that if you have the ability to really be touching key accounts regularly in a proactive way, then of course, there’s the question of, is it over email? Is it over phone? Is it over video, Skype, or what have you, or is it in person? Then we really look at all of those mediums and determine really according even to customer spend. When we have a quarterly business review, that’s the proactive. We have a quarterly business review with our larger clients and that’s on site in person for our top accounts. For medium sized accounts, we do a QBR but it’s probably over video conferencing.

You said an acronym there, QBR. I just want to make sure everybody knows what that means. Would you define that really quick?

Quarterly Business Review.

Did the investors talk to your top customers to see why they were sticking and growing so fast before they give you your series A funding?

Yeah. We did do client references. Ironically, literally five minutes before we started talking today, John, we actually just initiated another round of client interviews with the investors we’re talking to for this round.

You are getting customers to scale very fast, right? That’s one of the things that investors love to see when they’re putting money in at any round level. Let’s talk about your expertise that you can share on how can startups scale smarter and faster?

Like you mentioned at the very beginning, that’s our core business. Essentially, that is what Cloud Factory’s whole purpose is in coming along side clients to help them scale their operations. Every business nowadays is thinking differently than they were ten, twenty years ago, where it’s not about necessarily having all full-time employees. We see most of our customers and companies thinking that I’ve got strategic work and non-strategic work.

For strategic work, I need to have my employees. I need to own that workforce, those need to be my actual employees. But for everything that’s not strategic, I really need to be thinking about more contingency ways to really staff that part of my business, to get more elasticity and sometimes to get more expertise. We often will draw a pyramid where at the very bottom base of the pyramid is automation and AI. Everyone wants to shift as much work as they can for efficiency reasons to that place. All the work that we can possibly automate, that’s what we do. We can justify the upfront investment of actually developing those models and technology.

Above that is looking more at a solution like Cloud Factory, where you’re able to get an on-demand workforce, where you’re able to have some levels of elasticity. You pay for what you use. Learning how to almost use a company like Cloud Factory as a tool in your tool belt to grow your company is something that we’re seeing is what a lot of winning companies are doing. Then you’ve got your full-time employees, doing your strategic work. Even at the very top of the pyramid, we often put experts. Even looking at freelancers, consultants, and contractors, I don’t necessarily need to hire those people, but there’s times when you have to pay $200-$500 an hour. Beginning to think about that core, middle of that triangle or pyramid as your full-time employees, but how do you then compliment and build your business, call it an enterprise 2.0 model, where you’re really thinking about how to augment your employees for growth and scaling operations.

It sounds like you’re using and applying this pyramid to your clients, which allows them to scale, which in turns then gives you more revenue because they’re seeing success so they spend more money with you. Is that accurate?

That’s exactly right. You got to get work done and you’re trying to find the best way to do it. Efficiency is important, but convenience and there are a lot of other factors. When someone begins to understand that, “I don’t have to do a traditional outsourcing. I don’t have to just hire freelancers. I don’t have to try and hire full-time employees or interns or temps or all these different ways to do it.” We love when people get it. That’s exactly how we can help them grow and they can obviously help us grow.

Let’s go back to, whether it was your seed round or your series A, because I’m imagining the answers are very different. One of the questions that comes up when you pitch for funding is, what’s your barrier to entry to competition? In other words, why can’t Microsoft or Google do what you’re doing? They’ve got all the money in the world and just wipe you out. That’s a big concern that investors have no matter what business you’re in. How did you prepare for that question?

Get 7M in Funding: For us, going to strategic locations and building those data centers looks completely different.

That’s a great question. Defensibility. I have a pretty non-standard answer for a tech company. I’m still a little apprehensive in sharing it, but you asked it so directly I feel like I have to. There’s no question, obviously in terms of intellectual property and protecting intellectual property and technology. We’ve got 55 engineers who have been working for years on our technology. We feel really confident that we’ve got a great head start in terms of technology.

That’s not actually where I usually go in answering this question. It’s really more about something we talked about earlier, with the “why” and the culture. The branding and for us, we have this thesis as a business that someone’s going to create the world’s workforce. The same idea of Cloud computing and AWS and other companies going to strategic low cost locations, building massive data centers, writing software on top of it to virtualize it and rent out slices of that to the world, to power the computing resources of the world. We believe that Cloud labor is also completely inevitable and someone’s going to do it.

For us, going to strategic locations and building those data centers looks completely different. It’s actually building delivery centers and it’s building very intelligent workforce model where we’ve invested a ton into. In 2012, we hired our first 25, what we call Cloud workers. We tried putting them in teams of five and they’re working from home but they would meet weekly with one of our full-time employees and a full-time employee, we call it Cloud seeder, would actually supervise twenty teams of five or 100 of these Cloud workers. We would do leadership lessons every week. We did community service projects. We’ve done over 4,700 community service projects as a company.

All that I say is that we’ve actually spent a huge amount not just developing technology, but developing a workforce model and a culture and iterated on a way to really know. The key is that we’ve done this with boots on the ground. This was me and my family and then other people coming from Canada and America and other places to live in Kathmandu and now to live in Nairobi and for us to partner all together to really do that. Whereas a lot of our competitors are tech companies building platforms in New York, San Francisco, Seattle, etc. that have never met any of their workers. They certainly have not been through to it. I usually get fairly graphic. How many of the other tech CEOs have gone through thirteen bouts of whatever living in a developing country?

We know that that’s a big part of the future of work, truly seeing the world as flat and leveraging technology to do it. But it’s a lot more than just technology. It involves building a culture, building a workforce model, being the best gig in town for the people that you’re trying to actually hire a talent for. We believe defensibility can be in that area of culture. It can be related to why. It can be a little bit more intangible than just how many patents you have.

The fact that you have boots on the ground, it keeps going back to the team. Everything is the team at any stage of the funding and not only is of the team that are here in the States, but the team around the world that you have boots on the ground. That’s a great, great answer. One final question, do you get asked a lot at any of these funding rounds about the exit strategy during due diligence? Do you think that the investors are looking to get a return on their investment in three to five years with somebody big buying you?

No question. Literally this morning, I had that conversation with investors that are pretty late stage. This is definitely a very recent and relevant question. Almost every fund that you talk to, they’ve got a life cycle, they’ve got a term. The key question I think to ask is, “How many years into the fund are you?” Usually, if it’s a ten-year term, they have to place all their money in the first five years. If they’re in year three or four, that’s trying to get later in the sense that they’re going to be looking for a faster return than if they just started in the last year or two. I think that’s something we’ve learned as we’ve talked more with different funds. Three to five is obviously a very standard answer. You can give whatever answer you want. When you sign that final definitive agreement and close, there’s usually going to be some terms that are related to them getting liquidity in some way, shape or form. It’s a key part of the terms.

When you have a growing company that really has big ambition to really continue growing and scaling, you’re going to be taking follow-on capital. Oftentimes, that follow-on capital is actually another option. It’s not as simple as, “Are you thinking acquisition or IPO?” There are different management bio and other PE, private equity type options that really do provide a very potential path for exit for funds that are on a fixed term.

Mark, is there a particular book you would recommend someone read, either about startups or life in general the “why,” anything that you think would help people.

The first that comes to mind is a couple friends put out a book, I think it’s probably about a year ago. I went through a business accelerator with them. It’s a great book called Get Backed. Definitely, for anyone who’s raising capital, it’s 100% required. Everything from email templates, in reaching out to investors, getting warm intros, a big part of it is around creating the pitch deck, creating a story, forming a storyline, story arch, it’s an essential. I definitely broke it out again as we prepared for this round.

How can people follow you? What’s your Twitter handle? All that good stuff.

Thanks, Mark. Congratulations on all your success. I’m sure the next round is going to be equally successful and we’re going to look forward to you coming back on and telling me about your successful exit in a year or so.